SECTION 25

Statement of Financial
Position
 Statement of Financial
Position(Balance Sheet)
• Definition : The Statement of Financial Position shows
the value of business’s assets and liabilities at a particular
time.

• A balance sheet is one of the annual (yearly) financial

statement that all companies are legally required to
submit for auditing purpose.

• It contains information about organization's Assets,

Liabilities and Capital invested by the owners.

• A balance sheet helps to ensures that all the monies

within the organization's are properly accounted.
 A balance sheet must contains three important parts :
1. Equity 2. Assets 3. Liabilities
(from where money received) (where money is used) (to whom to pay)
 Assets
• Definition : Assets are those items of value which are owned by the business. They may be Non-Current Assets and
Current Assets (Eg : Cash, Stocks, Building, Machinery, Furniture)

• To purchase assets, organization need different source of finance.

• Assets Can be classified as :

1. Fixed Assets (Non-Current Assets)

2. Current Assets
 Liabilities
• Definition : Liabilities are debts owed by the business There may be Non-current Liabilities and Current Liabilities

• A liability is a legal obligation (responsibility) of a organization to repay its lenders or suppliers at a later date.

• Liabilities can be classified as :

1. Long-term liabilities (Non-Current Liabilities)

2. Current Liabilities
 Fixed Asset (Non-Current Assets)

• Definition : Fixed Assets are items owned by the

business for more than one year

• A fixed asset is any asset used for business operation (for

producing goods and services) which will be in
organization for more than 12 months.

• Examples : Machinery, Furniture, Premises, Land,

Building, Computer
 Current Assets
• Definition : Current Assets are owned by the business and
used within one year.

• It refers to cash or any other liquid assets that can be easily

converted into cash within 12 months.

• There are three types of current assets

• 1. Cash

• 2. Debtors

• 3. Stocks
A. Long Term Liabilities (Non-Current Liabilities) B. Current Liabilities

• Definition : Non-Current Liabilities are long term debts • Definition : Current Liabilities are Short term debts owned
owned by the business, repaid over more than one year by the business, repaid in less than one year

• Examples : Debentures, Mortgage, Bank Loan • Examples : Government Taxes, Creditors, Bank Overdraft
 Assets (Owns) Liabilities (Owes)

Fixed Assets Current Assets Long Term Liabilities Current Liabilities

1. Land 1. Cash 1. Mortgage 1. Bank Overdraft
2. Building 2. Debtors / Trade 2. Debentures 2. Short Term Loans
3. Office Receivables / Customers 3. Long Term Loans 3. Creditors / Suppliers / Trade

4. Furniture 3. Stock / Inventory 4. Bank Loans Payables

5. Plant & Machinery 4. Short Term Investment

6. Motor Vehicles
7. Long Term Investment
 Shareholder Equity
• Shareholder Equity is the total sums of money invested into the business by the owners of the company

• There are two main sections :

1. Share Capital – Money put into the business when shareholders bought newly issued shares

Example : Company sold 1,000 shares which has a value of Rs 10 per share, then the issued share capital of such a company is Rs.10,000.

2. Profit and Loss Account Reserves – Retained profits from current year and previous year.

Shareholder Equity = Share Capital + Profit & Loss Account Reserves

Balance sheet for ______ (Put Company Name) as on _________ (Mention date and year given in question)
 Balance sheet for ______ (Put Company Name) as on _________ (Mention date and year given in question)
Particulars $'000 $'000
 Balance sheet for ______ (Put Company Name) as on _________ (Mention date and year given in question)
Particulars $'000 $'000

Fixed Assets
 Balance sheet for ______ (Put Company Name) as on _________ (Mention date and year given in question)
Particulars $'000 $'000

Fixed Assets

Land XX

Building XX

Plant & Machinery XX

Office XX

Furniture XX

Motor Vehicles XX

Long Term Investment XX

 Balance sheet for ______ (Put Company Name) as on _________ (Mention date and year given in question)
Particulars $'000 $'000

Fixed Assets

Land XX

Building XX

Plant & Machinery XX

Office XX

Furniture XX

Motor Vehicles XX

Long Term Investment XX

Less : Accumulated Depreciation (XX)

 Balance sheet for ______ (Put Company Name) as on _________ (Mention date and year given in question)
Particulars $'000 $'000

Fixed Assets

Land XX

Building XX

Plant & Machinery XX

Office XX

Furniture XX

Motor Vehicles XX

Long Term Investment XX

Less : Accumulated Depreciation (XX)

Net Fixed Assets XXX

Current Assets
Current Assets
Cash XX
Debtors / Trade Receivables / Customers XX
Stock XX
Short Term Investment XX XX
Current Assets
Cash XX
Debtors / Trade Receivables / Customers XX
Stock XX
Short Term Investment XX XX
Less : Current Liabilities
Creditors / Trade Payable / Suppliers (XX)
Bank Overdraft (XX)
Short Term Loans (XX) (XX)
Current Assets
Cash XX
Debtors / Trade Receivables / Customers XX
Stock XX
Short Term Investment XX XX
Less : Current Liabilities
Creditors / Trade Payable / Suppliers (XX)
Bank Overdraft (XX)
Short Term Loans (XX) (XX)
Net Current Assets (Current Assets - Current Liabilities) XX
Current Assets
Cash XX
Debtors / Trade Receivables / Customers XX
Stock XX
Short Term Investment XX XX
Less : Current Liabilities
Creditors / Trade Payable / Suppliers (XX)
Bank Overdraft (XX)
Short Term Loans (XX) (XX)
Net Current Assets (Current Assets - Current Liabilities) XX

Total Assets (Net Fixed Assets + Net Current Assets) XXX

Current Assets
Cash XX
Debtors / Trade Receivables / Customers XX
Stock XX
Short Term Investment XX XX
Less : Current Liabilities
Creditors / Trade Payable / Suppliers (XX)
Bank Overdraft (XX)
Short Term Loans (XX) (XX)
Net Current Assets (Current Assets - Current Liabilities) XX

Total Assets (Net Fixed Assets + Net Current Assets) XXX

Less : Long Term Liabilities
Current Assets
Cash XX
Debtors / Trade Receivables / Customers XX
Stock XX
Short Term Investment XX XX
Less : Current Liabilities
Creditors / Trade Payable / Suppliers (XX)
Bank Overdraft (XX)
Short Term Loans (XX) (XX)
Net Current Assets (Current Assets - Current Liabilities) XX

Total Assets (Net Fixed Assets + Net Current Assets) XXX

Less : Long Term Liabilities
Mortgage (XX)
Debentures (XX)
Long Term Loan / Bank Loan (XX) (XX)
Current Assets
Cash XX
Debtors / Trade Receivables / Customers XX
Stock XX
Short Term Investment XX XX
Less : Current Liabilities
Creditors / Trade Payable / Suppliers (XX)
Bank Overdraft (XX)
Short Term Loans (XX) (XX)
Net Current Assets (Current Assets - Current Liabilities) XX

Total Assets (Net Fixed Assets + Net Current Assets) XXX

Less : Long Term Liabilities
Mortgage (XX)
Debentures (XX)
Long Term Loan / Bank Loan (XX) (XX)
Net Assets (Total Assets - Long Term Laibilities) XXX
Current Assets
Cash XX
Debtors / Trade Receivables / Customers XX
Stock XX
Short Term Investment XX XX
Less : Current Liabilities
Creditors / Trade Payable / Suppliers (XX)
Bank Overdraft (XX)
Short Term Loans (XX) (XX)
Net Current Assets (Current Assets - Current Liabilities) XX

Total Assets (Net Fixed Assets + Net Current Assets) XXX

Less : Long Term Liabilities
Mortgage (XX)
Debentures (XX)
Long Term Loan / Bank Loan (XX) (XX)
Net Assets (Total Assets - Long Term Laibilities) XXX

Shareholders Equity
Share Capital XX
Profit and Loss Account Reserves XX
Shareholder Equity (Share Capital + Profit and Loss Account Reserves) XXX
 Formula
1. Net Current Assets = Current Assets - Current Liabilities

2. Total Assets = Net Fixed Assets + Net Current Assets

3. Net Assets = Total Assets - Long Term Liabilities

4. Shareholders Equity = Share Capital + Profit and Loss Account Reserves

5. Net Assets = Shareholder Equity

 Q1. The financial data for ABC Ltd are shown below. The company reporting day for the balance
sheet is 31st March, 2019

Plant & Machinery = $ 300 Land = $ 700

Motor Vehicles = $ 500 Furniture = $ 100
Building = $ 400 Cash = $ 250
Debtors = $ 30 Stock = $ 200
Short Term Loans = $ 15 Trade Creditors = $ 250
Taxation = $ 55 Mortgage = $ 500
Debentures = $ 500 Bank Loan = $ 100
Share Capital = $ 1,000 Accumulated Retained Profits = $ 60

a) From the provided data, Construct a balance sheet for ABC Ltd
 Balance sheet for ABC Ltd as on 31st March, 2019
Particulars $'000 $'000
 Balance sheet for ABC Ltd as on 31st March, 2019
Particulars $'000 $'000
Fixed Assets
Land 700
Building 400
Plant & Machinery 300
Furniture 100
Motor Vehicles 500
 Balance sheet for ABC Ltd as on 31st March, 2019
Particulars $'000 $'000
Fixed Assets
Land 700
Building 400
Plant & Machinery 300
Furniture 100
Motor Vehicles 500
Net Fixed Assets 2,000
 Balance sheet for ABC Ltd as on 31st March, 2019
Particulars $'000 $'000
Fixed Assets
Land 700
Building 400
Plant & Machinery 300
Furniture 100
Motor Vehicles 500
Net Fixed Assets 2,000
Current Assets
 Balance sheet for ABC Ltd as on 31st March, 2019
Particulars $'000 $'000
Fixed Assets
Land 700
Building 400
Plant & Machinery 300
Furniture 100
Motor Vehicles 500
Net Fixed Assets 2,000
Current Assets
Cash 250
Debtors 30
Stock 200 480
 Balance sheet for ABC Ltd as on 31st March, 2019
Particulars $'000 $'000
Fixed Assets
Land 700
Building 400
Plant & Machinery 300
Furniture 100
Motor Vehicles 500
Net Fixed Assets 2,000
Current Assets
Cash 250
Debtors 30
Stock 200 480
Less : Current Liabilities
 Balance sheet for ABC Ltd as on 31st March, 2019
Particulars $'000 $'000
Fixed Assets
Land 700
Building 400
Plant & Machinery 300
Furniture 100
Motor Vehicles 500
Net Fixed Assets 2,000
Current Assets
Cash 250
Debtors 30
Stock 200 480
Less : Current Liabilities
Trade Creditors (250)
Short Term Loans (15)
Taxation (55) (320)
 Balance sheet for ABC Ltd as on 31st March, 2019
Particulars $'000 $'000
Fixed Assets
Land 700
Building 400
Plant & Machinery 300
Furniture 100
Motor Vehicles 500
Net Fixed Assets 2,000
Current Assets
Cash 250
Debtors 30
Stock 200 480
Less : Current Liabilities
Trade Creditors (250)
Short Term Loans (15)
Taxation (55) (320)
Net Current Assets (Current Assets - Current Liabilities) 160 (480 - 320)
 Balance sheet for ABC Ltd as on 31st March, 2019
Particulars $'000 $'000
Fixed Assets
Land 700
Building 400
Plant & Machinery 300
Furniture 100
Motor Vehicles 500
Net Fixed Assets 2,000
Current Assets
Cash 250
Debtors 30
Stock 200 480
Less : Current Liabilities
Trade Creditors (250)
Short Term Loans (15)
Taxation (55) (320)
Net Current Assets (Current Assets - Current Liabilities) 160 (480 - 160)

Total Assets (Net Fixed Assets + Net Current Assets) 2,160 (2,000 + 160)
Less : Long Term Liabilities
Less : Long Term Liabilities
Mortgage (500)
Debentures (500)
Bank Loan (100) (1,100)
Less : Long Term Liabilities
Mortgage (500)
Debentures (500)
Bank Loan (100) (1,100)
Net Assets (Total Assets - Long Term Laibilities) 1,060
Less : Long Term Liabilities
Mortgage (500)
Debentures (500)
Bank Loan (100) (1,100)
Net Assets (Total Assets - Long Term Laibilities) 1,060

Financed By
Less : Long Term Liabilities
Mortgage (500)
Debentures (500)
Bank Loan (100) (1,100)
Net Assets (Total Assets - Long Term Laibilities) 1,060

Financed By
Share Capital 1,000
Retained Profits 60
Less : Long Term Liabilities
Mortgage (500)
Debentures (500)
Bank Loan (100) (1,100)
Net Assets (Total Assets - Long Term Laibilities) 1,060

Financed By
Share Capital 1,000
Retained Profits 60
Equity (Share Capital + Retained Profits) 1,060
Less : Long Term Liabilities
Mortgage (500)
Debentures (500)
Bank Loan (100) (1,100)
Net Assets (Total Assets - Long Term Laibilities) 1,060

Financed By
Share Capital 1,000
Retained Profits 60
Equity (Share Capital + Retained Profits) 1,060

Net Assets = Equity

1,060 = 1,060
 Q2. The financial data for XYZ Ltd are shown below. The company reporting day for the balance
sheet is 31st March, 2018 (HomeWork Sum)

Fixed Assets = $ 480 Cash = $ 10

Debtors = $ 12 Stock = $ 35
Short Term Loans = $ 22 Creditors = $ 15
Bank Overdraft = $ 5 Long Term Laibilities = $ 300
Share Capital = $ 110 Accumulated Retained Profits = $ 85

a) From the provided data, Construct a balance sheet for XYZ Ltd
 Balance sheet for XYZ Ltd as on 31st March, 2018
Particulars $'000 $'000
Fixed Assets 480
Net Fixed Assets 480
Current Assets
Cash 10
Debtors 12
Stock 35 57
Less : Current Liabilities
Creditors 15
Short Term Loans 22
Bank Overdraft 5 (42)
Net Current Assets (Current Assets - Current Liabilities) 15

Total Assets (Net Fixed Assets + Net Current Assets) 495

Less : Long Term Liabilities (300)
Net Assets (Total Assets - Long Term Laibilities) 195
Financed By

Share Capital 110

Retained Profits 85

Equity (Share Capital + Retained Profits) 195

Net Assets = Equity

195 = 195
 Q3. The financial data for Marc Brothers Motor Repairs are shown below. The company
reporting day for the balance sheet is 31st March

Property = $ 630,000, Machinery and Vehicles = $ 230,000, Depreciation = $ 144,000, Stock =

$ 30,000, Cash = $ 12,000, Debtors = $16,000, Overdraft = $ 13,000, Loan Capital = $ 380,000,
Share Capital = $ 300,000, Accumulated Retained Profits = $ 81,000

a) Define the term balancesheet

b) From the provided data, Construct a balance sheet for XYZ Ltd
 Balance sheet for Marc Brothers Motor Repairs as on 31st March
Particulars $ $
 Balance sheet for Marc Brothers Motor Repairs as on 31st March
Particulars $ $
Fixed Assets
Property 630,000
Machinery and Vehicles 230,000
Less : Depreciation (144,000)
 Balance sheet for Marc Brothers Motor Repairs as on 31st March
Particulars $ $
Fixed Assets
Property 630,000
Machinery and Vehicles 230,000
Less : Depreciation (144,000)
Net Fixed Assets 716,000
 Balance sheet for Marc Brothers Motor Repairs as on 31st March
Particulars $ $
Fixed Assets
Property 630,000
Machinery and Vehicles 230,000
Less : Depreciation (144,000)
Net Fixed Assets 716,000
Current Assets
Cash 12,000
Debtors 16,000
Stock 30,000 58,000
 Balance sheet for Marc Brothers Motor Repairs as on 31st March
Particulars $ $
Fixed Assets
Property 630,000
Machinery and Vehicles 230,000
Less : Depreciation (144,000)
Net Fixed Assets 716,000
Current Assets
Cash 12,000
Debtors 16,000
Stock 30,000 58,000
Less : Current Liabilities
Overdraft (13,000) (13,000)
 Balance sheet for Marc Brothers Motor Repairs as on 31st March
Particulars $ $
Fixed Assets
Property 630,000
Machinery and Vehicles 230,000
Less : Depreciation (144,000)
Net Fixed Assets 716,000
Current Assets
Cash 12,000
Debtors 16,000
Stock 30,000 58,000
Less : Current Liabilities
Overdraft (13,000) (13,000)
Net Current Assets (Current Assets - Current Liabilities) 45,000
 Balance sheet for Marc Brothers Motor Repairs as on 31st March
Particulars $ $
Fixed Assets
Property 630,000
Machinery and Vehicles 230,000
Less : Depreciation (144,000)
Net Fixed Assets 716,000
Current Assets
Cash 12,000
Debtors 16,000
Stock 30,000 58,000
Less : Current Liabilities
Overdraft (13,000) (13,000)
Net Current Assets (Current Assets - Current Liabilities) 45,000

Total Assets (Net Fixed Assets + Net Current Assets) 761,000

 Balance sheet for Marc Brothers Motor Repairs as on 31st March
Particulars $ $
Fixed Assets
Property 630,000
Machinery and Vehicles 230,000
Less : Depreciation (144,000)
Net Fixed Assets 716,000
Current Assets
Cash 12,000
Debtors 16,000
Stock 30,000 58,000
Less : Current Liabilities
Overdraft (13,000) (13,000)
Net Current Assets (Current Assets - Current Liabilities) 45,000

Total Assets (Net Fixed Assets + Net Current Assets) 761,000

Less : Long Term Liabilities
Loan Capital (380,000) (380,000)
 Balance sheet for Marc Brothers Motor Repairs as on 31st March
Particulars $ $
Fixed Assets
Property 630,000
Machinery and Vehicles 230,000
Less : Depreciation (144,000)
Net Fixed Assets 716,000
Current Assets
Cash 12,000
Debtors 16,000
Stock 30,000 58,000
Less : Current Liabilities
Overdraft (13,000) (13,000)
Net Current Assets (Current Assets - Current Liabilities) 45,000

Total Assets (Net Fixed Assets + Net Current Assets) 761,000

Less : Long Term Liabilities
Loan Capital (380,000) (380,000)
Net Assets (Total Assets - Long Term Laibilities) 381,000
Financed By
Financed By

Share Capital 300,000

Financed By

Share Capital 300,000

Retained Profits 81,000

Financed By

Share Capital 300,000

Retained Profits 81,000

Equity (Share Capital + Retained Profits) 381,000

Q4. Bajaj Electronics is an importer and exporter of consumer electronic products and computer accessories.
Selected financial data from the company on 31st December are shown below
Particulars Year 2019 Year 2018
$'000 $'000
Bank Overdraft 20 10
Cash 25 20
Creditors 50 50
Debentures 50 50
Debtors 70 50
Fixed Assets 250 250
Long Term Laibilities 50 80
Retained Profits 75 75
Share Capital 200 150
Stock 100 95

a) Identify any one example of Fixed Asset and one example of Stock for Bajaj Electronics

b) Construct a balance sheet for Bajaj Electronics for both years

 Balance sheet for Bajaj Electronics as on 31st December
Particulars 2019 2018

$'000 $'000 $'000 $'000

Fixed Assets 250 250

Net Fixed Assets 250 250

Current Assets

Cash 70 50

Debtors 25 20

Stock 100 195 95 165

Less : Current Liabilities

Overdraft (20) (10)

Creditors (50) (70) (50) (60)

Net Current Assets (Current Assets - Current Liabilities) 125 105

Total Assets (Net Fixed Assets + Net Current Assets) 375 355
Less : Long Term Liabilities

Long Term Liabilities (50) (80)

Debentures (50) (100) (50) (130)

Net Assets (Total Assets - Long Term Laibilities) 275 225

Financed By

Share Capital 200 150

Retained Profits 75 75

Equity (Share Capital + Retained Profits) 275 225

Ans a)
Examples of Fixed Assets : Premises, Equipment, Machinery

Examples of Stock : Computer Equpiment and Computer Accessories

Q5. Hendra Senjaya runs Senjaya Fabrics Ltd. a garment manufacturer in Indonesia. Hendra has provided excrepts from the
finance department which shows the following
(All figures are in millions of Indonesian rupiah as at 31st March this year) (IDR = Indonesian Rupiah) (Homework Sum)

Particulars IDR (in Millions)

Cash 32
Creditors 45
Debtors 35
Mortgage 127
Overdraft 30
Property 350
Accumulated Retained Profits 100
Share Capital 175
Stocks 60

a) Define the term Share Capital

b) Construct a balance sheet for Senjaya fabrics Ltd

 Intangible Assets

• Intangible assets are non-physical fixed assets that have the ability to earn revenue for a business

• Intangible assets can account for a large proportion of a firm's asset value, although it is usually difficult to
place an objective and accurate price on such assets.

• They are legally protected by Intellectual Property Rights(IPR)

• IPR - Intellectual property is the product of the human intellect including creativity concepts, inventions,
industrial models, trademarks, songs, literature, symbols, names, brands,....etc.
 Types of Intangible Fixed Assets
1. Brand
• A brand is a name given to a product and/or service such
that it takes on an identity by itself.

• Brand recognition and Brand Value help to drive global

sales for companies .

• Branding is an indefinite asset as brand recognition and

brand loyalty stay with the company for as long as it
operates.
 Types of Intangible Fixed Assets
2. Patents

• Patents provide legal protection for inventors,

preventing others from copying their creation
for a fixed number of years

• Patents allow the inventor to have exclusive

rights to commercial production for a specified
time period.

• Other firms must apply and pay a fee to the

patent holder if they wish to use or copy the
ideas, processes or products created by the
inventor.
 Types of Intangible Fixed Assets
3. Copyright

• Copyright (©) provides legal protection for the original artistic work of the
creator, such as an author, photographer, painter or musician.

• Media sources such as newspapers, sound recordings, computer software and

movies are examples of such works

• Anyone wishing to reproduce or modify the artist's work must first seek
permission from the copyright holder, usually for a fee.
 4. Goodwill

Goodwill is the value of an organization's image and

Types of reputation. It can also include the value of the firm's

customer base and its business connections.

Intangible A business that treats its workers well is likely to see a lot of

Fixed Assets goodwill from its staff, i.e. employees are loyal to the firm
and consequently add greater value.

Goodwill is then the sum of customer and staff loyalty and

can provide a major competitive edge for any business.
 Types of Intangible Fixed Assets
5. Registered Trademarks

• Registered trademarks (®) are distinctive signs that uniquely identify a brand, a product or a business.

• Trademarks can be expressed by names, symbols, phrases or an image, such as the Nike 'swoosh' mark.

• Registered trademarks can be sold so ownership can be transferred for appropriate fees, and is reflected in the firm's
balance sheet.

• Like copyrights and patents, trademarks provide legal protection against those who might try to copy their creations
and inventions.
 Depreciation
• The monetary value of an asset decreases over time due to
use, wear and tear or obsolescence.

• This decrease is measured as depreciation.

• Property and land tend to rise in value over time. The

increase in the value of fixed assets is known as
appreciation.

• However, most fixed assets tend to depreciate over time.

• Depreciation is the fall in the value of fixed assets over time due to :

1. Wear and Tear

• When Fixed assets are used repeatedly over time, so they tend to wear out and raise maintenance costs.
Hence, the value of these fixed assets declines over time.

2. Obsolescence

• As new and better or innovative products are available in the market, the demand and value of the existing
fixed assets will fall.

• Obsolete assets are out-of-date assets such as old versions of vehicles, computers or software.
 Methods of Calculating Depreciation

1. STRAIGHT LINE METHOD 2. REDUCING BALANCE

METHOD
 Straight Line Method (SLM)
• Straight Line Method is the simplest and most used methods in the industry.

• The annual depreciation is calculated using three key variables:

1. Life expectancy of the asset

2. Scrap or Residual Value of the asset

3. Purchase cost of the asset.

Formula : Annual Depreciation = Purchase Cost – Residual Value

Life Span of Asset

Residual Value

• The residual value is an estimate of the scrap or disposal value of the asset at the end of its useful life.
 Example
ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Calculate the depreciation as per Straight Line Method
 Example
ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Calculate the depreciation as per Straight Line Method

Solution :

Annual Depreciation = Purchase Cost – Residual Value.

Life Span of Asset
 Example
ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Calculate the depreciation as per Straight Line Method

Solution :

Annual Depreciation = Purchase Cost – Residual Value. = 25,000 – 0

Life Span of Asset 5 Years
 Example
ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Calculate the depreciation as per Straight Line Method

Solution :

Annual Depreciation = Purchase Cost – Residual Value. = 25,000 – 0 = 5,000/-

Life Span of Asset 5 Years
 Example
ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Calculate the depreciation as per Straight Line Method

Solution :

Annual Depreciation = Purchase Cost – Residual Value. = 25,000 – 0 = 5,000/-

Life Span of Asset 5 Years

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
 Example
ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Calculate the depreciation as per Straight Line Method

Solution :

Annual Depreciation = Purchase Cost – Residual Value. = 25,000 – 0 = 5,000/-

Life Span of Asset 5 Years

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 5,000 20,000
 Example
ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Calculate the depreciation as per Straight Line Method

Solution :

Annual Depreciation = Purchase Cost – Residual Value. = 25,000 – 0 = 5,000/-

Life Span of Asset 5 Years

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 5,000 20,000
2 5,000 15,000
 Example
ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Calculate the depreciation as per Straight Line Method

Solution :

Annual Depreciation = Purchase Cost – Residual Value. = 25,000 – 0 = 5,000/-

Life Span of Asset 5 Years

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 5,000 20,000
2 5,000 15,000
3 5,000 10,000
 Example
ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Calculate the depreciation as per Straight Line Method

Solution :

Annual Depreciation = Purchase Cost – Residual Value. = 25,000 – 0 = 5,000/-

Life Span of Asset 5 Years

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 5,000 20,000
2 5,000 15,000
3 5,000 10,000
4 5,000 5,000
 Example
ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Calculate the depreciation as per Straight Line Method

Solution :

Annual Depreciation = Purchase Cost – Residual Value. = 25,000 – 0 = 5,000/-

Life Span of Asset 5 Years

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 5,000 20,000
2 5,000 15,000
3 5,000 10,000
4 5,000 5,000
5 5,000 0
 Reducing Balance Method
• The Reducing balance method is an accelerated depreciation system of recording higher amount of depreciation amount
during the earlier years of an asset’s useful life and recording smaller amount depreciation amount during the asset's later
years.

• The book value of the asset is calculated by deducting the accumulated (cumulative) depreciation from the historic cost
(purchase cost) of the asset

Formula :

Net Book Value = Historical Cost – Accumulated Depreciation

 Example
• ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Company choose to depreciate the security system at annual rate of 25% Calculate the depreciation as
per Reducing Balance Method.
 Example
• ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Company choose to depreciate the security system at annual rate of 25% Calculate the depreciation as
per Reducing Balance Method.

Solution

Year End Depreciation (Rs) Book Value(Rs)

 Example
• ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Company choose to depreciate the security system at annual rate of 25% Calculate the depreciation as
per Reducing Balance Method.

Solution

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
 Example
• ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Company choose to depreciate the security system at annual rate of 25% Calculate the depreciation as
per Reducing Balance Method.

Solution

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 6,250 (25,000 X 25%)
 Example
• ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Company choose to depreciate the security system at annual rate of 25% Calculate the depreciation as
per Reducing Balance Method.

Solution

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 6,250 (25,000 X 25%) 18,750 (25,000 – 6,250)
 Example
• ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Company choose to depreciate the security system at annual rate of 25% Calculate the depreciation as
per Reducing Balance Method.

Solution

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 6,250 (25,000 X 25%) 18,750 (25,000 – 6,250)
2 4,687 (18,750 X 25%)
 Example
• ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Company choose to depreciate the security system at annual rate of 25% Calculate the depreciation as
per Reducing Balance Method.

Solution

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 6,250 (25,000 X 25%) 18,750 (25,000 – 6,250)
2 4,687 (18,750 X 25%) 14,063 (18,750 – 4,687)
 Example
• ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Company choose to depreciate the security system at annual rate of 25% Calculate the depreciation as
per Reducing Balance Method.

Solution

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 6,250 (25,000 X 25%) 18,750 (25,000 – 6,250)
2 4,687 (18,750 X 25%) 14,063 (18,750 – 4,687)
3 3,516 (14,063 X 25%)
 Example
• ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Company choose to depreciate the security system at annual rate of 25% Calculate the depreciation as
per Reducing Balance Method.

Solution

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 6,250 (25,000 X 25%) 18,750 (25,000 – 6,250)
2 4,687 (18,750 X 25%) 14,063 (18,750 – 4,687)
3 3,516 (14,063 X 25%) 10,547 (14,063 – 3,516)
 Example
• ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Company choose to depreciate the security system at annual rate of 25% Calculate the depreciation as
per Reducing Balance Method.

Solution

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 6,250 (25,000 X 25%) 18,750 (25,000 – 6,250)
2 4,687 (18,750 X 25%) 14,063 (18,750 – 4,687)
3 3,516 (14,063 X 25%) 10,547 (14,063 – 3,516)
4 2,637 (10,547 X 25%)
 Example
• ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Company choose to depreciate the security system at annual rate of 25% Calculate the depreciation as
per Reducing Balance Method.

Solution

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 6,250 (25,000 X 25%) 18,750 (25,000 – 6,250)
2 4,687 (18,750 X 25%) 14,063 (18,750 – 4,687)
3 3,516 (14,063 X 25%) 10,547 (14,063 – 3,516)
4 2,637 (10,547 X 25%) 7,910 (10,547 – 2,637)
 Example
• ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Company choose to depreciate the security system at annual rate of 25% Calculate the depreciation as
per Reducing Balance Method.

Solution

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 6,250 (25,000 X 25%) 18,750 (25,000 – 6,250)
2 4,687 (18,750 X 25%) 14,063 (18,750 – 4,687)
3 3,516 (14,063 X 25%) 10,547 (14,063 – 3,516)
4 2,637 (10,547 X 25%) 7,910 (10,547 – 2,637)
5 1,977 (7,910 X 25%)
 Example
• ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Company choose to depreciate the security system at annual rate of 25% Calculate the depreciation as
per Reducing Balance Method.

Solution

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 6,250 (25,000 X 25%) 18,750 (25,000 – 6,250)
2 4,687 (18,750 X 25%) 14,063 (18,750 – 4,687)
3 3,516 (14,063 X 25%) 10,547 (14,063 – 3,516)
4 2,637 (10,547 X 25%) 7,910 (10,547 – 2,637)
5 1,977 (7,910 X 25%) 5,933 (7,910 – 1,977)
 Example
• ABC Ltd purchased an electronic security system worth Rs. 25,000/- and it is expected to have a life of 5
years. Company choose to depreciate the security system at annual rate of 25% Calculate the depreciation as
per Reducing Balance Method.

Solution

Year End Depreciation (Rs) Book Value(Rs)

0 - 25,000
1 6,250 (25,000 X 25%) 18,750 (25,000 – 6,250)
2 4,687 (18,750 X 25%) 14,063 (18,750 – 4,687)
3 3,516 (14,063 X 25%) 10,547 (14,063 – 3,516)
4 2,637 (10,547 X 25%) 7,910 (10,547 – 2,637)
5 1,977 (7,910 X 25%) 5,933 (7,910 – 1,977)

Residual Value : 5,933/-

Q. Chard-Reid Enterprise Inc recently bought a new company car for $35,000. The firm expects to replace it in 5
years time. The current market resale value of the car in 5-year time is $5,800. Company uses annual 30%
depreciation rate

a) Use the reducing balance method of depreciation to calculate the book value of Chard-Reid Enterprise Inc new
company car after the first two years. (3 Marks)

b) Calculate how much the car would have depreciated in the same time period if Chard-Reid Enterprise had used
the straight-line method of depreciation. (3 Marks)

c) Explain which method of depreciation would reduce the net book value of the car the most by the end of the
third year. (4 Marks)
a) Use the reducing balance method of depreciation to calculate the book value of Chard-Reid Enterprise Inc new company car
after the first two years. (3 Marks)
a) Use the reducing balance method of depreciation to calculate the book value of Chard-Reid Enterprise Inc new company car
after the first two years. (3 Marks)
• Reducing Balance Method
Year End Depreciation ($) Book Value($)
0 - $ 35,000
1 $ 10,500 (35,000 X 30%) $ 24,500 (35,000 – 10,500)
2 $ 7,350 (24,500 X 30%) $ 17,150 (24,500 – 7,350)
a) Use the reducing balance method of depreciation to calculate the book value of Chard-Reid Enterprise Inc new company car
after the first two years. (3 Marks)
• Reducing Balance Method
Year End Depreciation ($) Book Value($)
0 - $ 35,000
1 $ 10,500 (35,000 X 30%) $ 24,500 (35,000 – 10,500)
2 $ 7,350 (24,500 X 30%) $ 17,150 (24,500 – 7,350)

b) Calculate how much the car would have depreciated in the same time period if Chard-Reid Enterprise had used
the straight-line method of depreciation. (3 Marks)
a) Use the reducing balance method of depreciation to calculate the book value of Chard-Reid Enterprise Inc new company car
after the first two years. (3 Marks)
• Reducing Balance Method
Year End Depreciation ($) Book Value($)
0 - $ 35,000
1 $ 10,500 (35,000 X 30%) $ 24,500 (35,000 – 10,500)
2 $ 7,350 (24,500 X 30%) $ 17,150 (24,500 – 7,350)

b) Calculate how much the car would have depreciated in the same time period if Chard-Reid Enterprise had used
the straight-line method of depreciation. (3 Marks)
• Straight Line Method
Annual Depreciation = Purchase Cost – Residual Value. = 35,000 – 5,800 = 5,840/-
Life Span of Asset 5 Years
a) Use the reducing balance method of depreciation to calculate the book value of Chard-Reid Enterprise Inc new company car
after the first two years. (3 Marks)
• Reducing Balance Method
Year End Depreciation ($) Book Value($)
0 - $ 35,000
1 $ 10,500 (35,000 X 30%) $ 24,500 (35,000 – 10,500)
2 $ 7,350 (24,500 X 30%) $ 17,150 (24,500 – 7,350)

b) Calculate how much the car would have depreciated in the same time period if Chard-Reid Enterprise had used
the straight-line method of depreciation. (3 Marks)
• Straight Line Method
Annual Depreciation = Purchase Cost – Residual Value. = 35,000 – 5,800 = 5,840/-
Life Span of Asset 5 Years

Year End Depreciation ($) Book Value($)

0 - $ 35,000
1 $ 5,840 $ 29,160 (35,000 – 5,840)
2 $ 5,840 $ 23,320 (29,160 – 5,840)
c) Explain which method of depreciation would reduce the net book value of the car the most by the end of the
third year.
• Reducing Balance Method
Year End Depreciation ($) Book Value($)

0 - $ 35,000
1 $ 10,500 (35,000 X 30%) $ 24,500 (35,000 – 10,500)
2 $ 7,350 (24,500 X 30%) $ 17,150 (24,500 – 7,350)
3 5,145 (17,150 X 30%) 12,005 (17,150 – 5,145)
• Straight Line Method

Year End Depreciation ($) Book Value($)

0 - $ 35,000
1 $ 5,840 $ 29,160 (35,000 – 5,840)
2 $ 5,840 $ 23,320 (29,160 – 5,840)
3 $ 5,840 $ 17,480 (23,320 – 5,840)

Hence, the Reducing Balance Method depreciates the Book Value of the car by a (significantly) greater amount in
3rd period.
 Limitations of Final Accounts
• The final accounts shows past data of the financial position of a firm. Past performance is not necessarily
indicative of current or future performance.

• The final accounts do not reveal the whole truth. Companies will limit the financial information that they
disclose since their accounts will be in the public domain and hence accessible by their rivals.

• Human resources are totally ignored. The skills, loyalty and motivation of staff are overlooked in financial
analysis. The inability to retain or motivate staff can have major repercussions on the future financial position
of the firm.

• Final accounts do not reveal anything about the firm's non-financial matters, such as its organizational culture.
Qualitative factors can be equally important in decision- making. For example, ethical objectives and the
location of industry are affected by both financial and non-financial factors.